We are indebted to Giovanni Ferri and Alberto Pozzolo for early discussions about the subject of the paper. We also wish to thank Ulrich Bindseil, Celso Brunetti, Craig Furfine, Eugenio Gaiotti, Giuseppe Grande, Nino Marseglia, Fabio Panetta, Marcello Pericoli, as well as participants to the Lacea-Lames Conference (Buenos Aires, October 1–3, 2009), the CEPR/ESI 13th Annual Conference on “Financial Supervision in an Uncertain World” (Venice, September 25–26, 2009), the Conference on “Liquidity and liquidity risk” organized by the Bundesbank, the European Banking Center and the European Business School (Frankfurt, September 23–24, 2010), the Conference in Memory of Alessandro Prati (International Monetary Fund, Washington, DC, June 24–25, 2010). All remaining errors are our own. The views expressed in this paper are of the authors’ and do not necessarily reflect those of the Bank of Italy.

Publication History

Issue published online: 20 JUL 2011

Article first published online: 20 JUL 2011

Received July 2, 2009; and accepted in revised form November 10, 2010.

Keywords:

E43;

E52

interbank markets;

spreads;

financial crisis

After the onset of the financial crisis, spreads between interbank interest rates on unsecured and secured deposits for the major world currencies became exceptionally large and volatile. First, we find that the phenomenon was mainly driven by aggregate—rather than bank-specific—factors, notably risk aversion, and accounting practices; by contrast, funding liquidity, capital shortage, and central bank interventions were not important determinants. Second, prior to August 2007, the spread was broadly insensitive to key borrower characteristics, whereas afterward it became somewhat more reactive to measures of creditworthiness. Third, conditions for big borrowers became relatively more favorable during the crisis, suggesting that moral hazard risks related to the “too-big-to-fail” argument have increased. These results are discussed in the light of theories on the interbank market during a crisis.